Research on the Liquidity Fragmentation Issue in the Layer 2 Era

As Ethereum shifts towards Layer 2-centered scaling solutions, coupled with the rise of tools like RaaS, a large number of public chains are rapidly developing. Many institutions hope to build their own chains to represent different interests and seek higher valuations. However, the emergence of numerous public chains has made it difficult for the ecosystem's development to keep pace with the public chains, leading to many projects experiencing a drop in value at the time of issuance.

With the help of OP Stack, multiple institutions have launched their own Layer 2; using ZK technology, some companies have also launched their own layer. Nowadays, the capital and technical thresholds for building a chain have been significantly lowered, with the cost of operating a chain based on OP Stack being about $10,000 per month.

The future will undoubtedly be an era of multi-chain coexistence. Although these Layer 2 chains may choose EVM compatibility for interoperability, it is difficult for them to build applications and reach consensus on the same chain due to the large number of downstream applications from the Web2 entities behind them.

The current multi-chain ecosystem brings a new challenge: Liquidity and state dispersion. Given that the existence of multiple chains is inevitable, interoperability is a field that must be explored and solved. Currently, there are many liquidity solutions, but their core essence is the same.

We use the industry-recognized Cake architecture to introduce the core components of cross-chain abstraction from top to bottom:

Application Layer: This is the layer where users interact directly, and it is also the most abstract layer in liquidity solutions, as it completely masks the details of liquidity conversion.

Permission Layer: Located below the application layer, users connect their wallets to the dApp and request quotes to fulfill their trading intentions. Here, "intent" refers to the user's expected final trading outcome, rather than the specific execution path of the trade.

Account Management and Abstraction Layer: A system for account management and abstraction that adapts to different chains is needed to maintain the unique account structures of each chain.

Layer 2: This layer is responsible for receiving and executing users' trading intentions. The Solver role competes here to provide a better user experience, including faster trading times and execution speeds.

Settlement Layer: This is the middleware layer used to achieve user intent in the solution layer. The core components of solutions for liquidity and state decentralization include oracles, cross-chain bridges, pre-confirmation schemes, data availability, and so on.

Currently, there are various solutions on the market to address liquidity fragmentation, mainly including the following methods:

1. Centered on RaaS: Assist in building Rollups on the OP Stack by joining specific shared sequencers and cross-chain bridges to share liquidity and state.

2. Account-Centric: Build a full-chain account wallet that supports signing and executing transactions across multiple blockchain protocols through "chain signature" technology.

3. Centered on the off-chain intention network: Users send intentions to the Solver network, and Solvers compete with quotes, providing the optimal completion time and transaction price.

4. Centered on the on-chain liquidity network: specifically optimize cross-chain liquidity issues, build a liquidity layer, and develop applications on this layer to share overall chain liquidity.

5. Centered on on-chain applications: Build high liquidity applications by integrating with major MM or third-party applications.

Solving the liquidity problem is a very important proposition; in the financial world, liquidity often represents everything. If a platform that integrates liquidity can be built, especially one that consolidates scattered liquidity across the entire chain, it will have great potential.

Next, we will discuss several typical projects of chain abstraction concepts to see how each of them addresses the issue of liquidity fragmentation from their own starting points.

INFINIT has built a RaaS service for the DeFi industry, which can provide the necessary components for directly building DeFi protocols, such as Oracle, Pool Type, IRM, Asset, etc., and also offers immediately usable components like Leverage Trading and Yield Strategy.

The Khalani Network has built three core components: the Intent Compatibility Layer, Validity, and the General Settlement Layer. External applications or the intent layer can publish intents to Khalani, and then Khalani's Intent Compatibility Layer can convert external intents into a format that the protocol Solver can recognize.

Liquorice is a decentralized application that enables auction-based price discovery and unilateral liquidity pools. Its primary mission is to provide professional trading firms with efficient inventory management tools and to easily connect to core DeFi protocols when settling trades with intended use.

Xion is built on the Comet BFT consensus protocol. Its cross-chain communication is based on Cosmos IBC, making it more native and secure than other cross-chain bridges.

=nil; Foundation proposed a zkSharding solution, which uses ZK technology to horizontally scale the Ethereum mainnet, executing sharding for parallel transaction processing and generating ZKP, while the main shard verifies data, communicates with Ethereum, and synchronizes network status among all validators.

ERC-7683 is an initiative by Ethereum to address the issue of cross-chain liquidity, with the core goal of establishing universal standards for cross-chain operations across L2 and sidechains, standardizing order and settlement interfaces to achieve seamless cross-chain execution.

The OP Stack addresses the issues of information transmission and Sequencer decentralization at once by designing a complete multi-Layer 2 solution. When using the OP Stack architecture, cross-chain contracts will be automatically deployed, and there will be a Supervisor to challenge and prevent the transmission of false cross-chain information.

Solving the problem of cross-chain liquidity is a very complex field with many solutions. We believe that the fragmentation of cross-chain liquidity, state, and user experience is an issue for the entire blockchain industry. If we think from a holistic perspective, it is necessary to approach it in a more abstract way, similar to chain abstraction. This is essentially the real entry into Web3, addressing the fragmentation in user experience while integrating liquidity and state in areas that users cannot perceive.

The future will definitely be multi-chain, and solving the problem of liquidity dispersion is an inevitable challenge that the industry must face. There is vast growth potential in integrating this cross-chain liquidity, which could possibly build the Google of the Web3 era.